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What happens at settlement when you buy a home – and what can go wrong

Buying a new home or a property can be one of the most exciting events of your life. In an ideal world it would be as easy as simply finding the money, paying the owner and receiving the title of the property.

Unfortunately, however, there are all sorts of pitfalls and possible traps that can appear during the property settlement process, and as your house will likely be the biggest investment of your life, it is wise to get reliable legal advice to protect your interests. Having a lawyer represent your interests ensures someone has your back should you encounter any problems during settlement.

People representing multiple interests required to be present at settlement

Put simply, at settlement, the purchaser gives the vendor’s legal representative the money owed for the property and the vendor hands over the property’s title deed. However, settlement of a property purchase can be a complex legal process that involves people representing several interests who are all required to be present.

In many settlements, people are selling one property to buy another, and therefore, you can end up with a group of solicitors or conveyancers representing their clients sitting around a table to examine documents.

Representatives of lenders also present at settlements involving mortgages

If a mortgage is involved – and it usually is – a representative from the lender may also attend to hand over funds for the purchase. If the vendor has a mortgage, a representative from their lender may also attend to ensure their loan is repaid.

When the lender has provided the money for the purchase, the lender will register a mortgage against the property. This means anyone who searches the title of the property will find the lender has an interest in the property as well and will need to be paid out if the new owner sells the property.

The purchaser’s legal representative has a vital part in the process. This person ensures that any mortgage or other third-party interest that existed on the title, such as a caveat, is removed before handover.

Make sure you identify contamination of land prior to settlement

Contamination of land is becoming an increasingly prevalent problem in Australia, as more attention is directed towards the environment. If you do not receive proper advice on what searches to make prior to purchasing a property, you could get caught with a contamination problem, which could cost you hundreds of thousands in rectification costs. Some councils in Sydney are now even making it an obligation to maintain an asbestos register for a property.

Particularly for rural and regional properties, contamination can also be a problem if there has been a sheep dip, chemical use, or petrol station on the site previously. In these cases, you should get reports done on contamination, or you risk paying the rectification costs post-settlement. Even if you are looking to buy a block of land without any structures on it, it is critical to get a building and pest inspection done to ensure the land is not contaminated.

What happens when contamination is only discovered after settlement

I know of a case where buyers purchased a block of land in a regional area. The property previously had a house, which was destroyed by fire, and the owner subsequently demolished what remained. The buyers elected not to get a building and pest report done and went ahead with the purchase.

Upon attempting to build a new house, it was discovered that the demolition had not been done correctly and the property was contaminated with asbestos. It meant that the buyers faced a bill in the tens of thousands to clean up the asbestos before a builder would work on the property.

I heard of another matter where a purchaser of a property needed to lodge a development application with council to change the permitted use of the land. The purchaser had declined the option to have a building and pest inspection carried out.

When council came to inspect the property, it transpired that the previous owner had not updated council in decades on the use of the land and an oil splotch was discovered. Council then ordered the new owner to pay for an inspection and report to ensure the land was not contaminated.

Importance of building and pest reports for identifying structural problems

Building and pest reports are also important for identifying structural problems which may not be immediately apparent when looking at a property. While building and pest reports are a cost to the purchaser, they could end up saving you tens or hundreds of thousands of dollars in rectification costs.

I heard of a matter involving a building on industrial land, where the buyers decided against getting a pest and building report done. After purchase, they finally inspected the property untenanted and discovered that a hole in the side wall of the building had damaged the structural beams. It ended up costing the new owners tens of thousands to fix the damage – significantly more than it would have cost them to get the report done beforehand.

These matters are extremely important. Had the properties described above been inspected correctly before exchanging contracts, the buyers could have saved themselves a hefty bill.

Each contract is different, but they often contain a clause stating that after exchange of contracts, all defects, whether they are latent or patent, become the responsibility of the purchaser and the vendor will not be liable for rectification of them.

Beware misrepresentation by real estate agents

Buyers also need to be aware of misrepresentations made by real estate agents, particularly concerning matters prior to the exchange of contracts. If you have been told something by the agent, you need to ensure it is included in the contract, or you may be left exposed.

One matter I came across involved buyers who did not get a building report done and discovered a significant structural defect in the property they were buying a couple of days prior to settlement. The buyers asked the agent if the vendors would agree to discount the price.

The agent subsequently told the buyers that he had spoken to the vendors and they had agreed to discount the price. However, upon contacting the vendors’ solicitors, the buyers discovered that the vendors had not agreed to this reduction in price at all.

In another matter I heard of, the purchase of a large block of land went ahead based on assurances by the agent that the property had town water. After settlement it was discovered that this was not the case.

The matter went to arbitration, but unfortunately for the buyer, there was nothing that could be done, as the contract stated that the buyer could not rely on representations made prior to exchange of contracts.

Vendors who insist that purchasers waive the cooling off period

It is important to note that buyers are generally protected under the 66W certificate in the Conveyancing Act, which gives the purchaser a right to a cooling off period. Unfortunately, we have seen some vendors making it a matter of course not to agree to the exchange of contracts unless the purchasers waive the cooling off period.

This tactic is essentially denying the purchasers their right to protection under the Act. If you encounter this when purchasing a property, you should seek legal advice immediately.

GSTand capital gains tax should not be overlooked

GST and Capital Gains Tax (CGT) are two important considerations that are often overlooked in property settlements. You should seek the advice of an accountant or lawyer if you are unsure whether these apply to you.

Developers should note that the Tax Office is now making it an obligation for lawyers to collect GST on settlement of new residential property and pay it directly to the Tax Office. Therefore, vendors need to be aware that they will need to provide their tax file number and Australian business number to the purchaser’s solicitor. Vendors should also keep in mind that their cash flow will reduce until their business activity statement return is completed.

Other possible settlement pitfalls to bear in mind

There are many other matters to deal with during property settlement, such as stamp duty, council rates, lender’s mortgage insurance and building and contents insurance.

It is also important to arrange a final inspection of the property before you finally go into settlement. You need to make sure that everything you paid for is working, such as water and electricity, that fixtures such as floor coverings are still in place and that there is no new structural damage.

A competent conveyancer or lawyer will be able to guide you through the settlement process and give you the peace of mind to enjoy your new property.

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